A New View of - Vassar College



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Lecture 1

Capitalism

Socialism

Communism

The Cold War Competitors

American Style Capitalism versus Soviet Centrally Planned system

Other systems – 3rd ways

The social market economy --- European social democracy (Germany, Sweden)

Market socialism -- worker-managed socialism (Yugoslavia)

Indicative planning – France

State-led capitalism -- Japan

Late Development Asian Capitalism -- Korea, Taiwan

Outmoded “isms”

Corporatism

Fascism – (Italy 1930s),

National Socialism

Peronism

Anarchism

New Kid on The Block --- Islamic Economics

.

WHAT IS AN ECONOMIC SYSTEM?

production decision WHAT

choice of technique HOW

distributional decision FOR WHOM

The concept of a system

Objects – laws

ECONOMIC INSTITUTIONS

HOUSEHOLDS

GOVERNMENT

Policy

Instruments

Measures

ENTERPRISES

LABOR ORGANIZATIONS

NONGOVERNMENTAL ORGANIZATIONS

MARKETS

RULES

ECONOMIC LAWS

THE LEGAL FRAMEWORK

RULES WITHIN ORGANIZATIONS

PROCEDURES

CUSTOM, CULTURE, AND TRADITION

ECONOMIC RESOURCES

NATURAL ASSETS

PRODUCED ASSETS

HUMAN CAPITAL

HOW WEALTH VARIES AMONG NATIONS

Table 1.1

Estimates of the Wealth of Nations, Dollars per Head: Selected Nations, 1995

Rank for Total Human Produced Natural

Total Wealth Country Wealth Capita Capital Resources

  1 Australia 835,000 175,350 58,450 592,850

 11 United States 421,000 248,390 67,360 105,250

 21 United Kingdom 324,000 268,920 45,360 9,720

 22 Singapore 306,000 260,100 45,900 0

 31 Saudi Arabia 184,000 51,520 33,120 101,200

 39 Greece 142,000 106,500 19,880 15,620

 54 Russia 98,000 14,700 14,700 68,600

 61 Mexico 74,000 54,020 8,140 11,840

 71 Estonia 55,000 39,050 7,700 7,700

 87 Iran 38,000 12,920 14,060 11,020

 96 Turkey 34,000 24,480 5,100 4,420

117 Romania 17,000 11,900 2,890 2,210

161 China 6,600 5,082 990 528

175 Kenya 3,800 2,128 1,216 456

181 Rwanda 2,900 2,030 638 261

192 Ethiopia 1,400 560 294 546

World Average 86,000 55,040 13,760 17,200

SOURCE: World Bank, Sustainability and the Wealth of Nations, 1995.

1. As a global average, almost two-thirds, 64 percent, of total wealth is embodied in human resources composed of individual human capital and social institutions.

2. The wealthiest nation on a per-head basis is Australia, which possesses large natural wealth distributed among a small, but highly educated population.

3. Most of the “top 25” nations in terms of aggregate wealth have natural assets comprising less than 10 percent (and most of these less than 5 percent) of total wealth, further suggesting that accrued human capital rather than initial resource endowment is the key to prosperity.

4. The variation in per-head wealth between nations is even more pronounced than the variation in per-head income. Australia, at the top, has about 500 times the wealth of Ethiopia, the bottom country.

THE DETERMINATION OF ECONOMIC OUTCOMES

Oi = Fi(NRi, PAi, HCi)

SOME FUNDAMENTALS OF ECONOMIC SYSTEMS

1. THE NATURE AND EXTENT OF INDIVIDUAL RIGHTS

Property Ownership and Property Rights

Socialism

Capitalism

control right

cash-flow right

disposal right

Freedom of Mobility and Employment

Extent of Government Ownership  

COMMAND VERSUS THE MARKET

Command Planning

Indicative Planning.  

Choice and the Market System.  

CENTRALIZATION VERSUS DECENTRALIZATION

INCENTIVES

The Principal Agent Problem

moral persuasion

Material incentives

coercion.

MEASURING THE DIFFERENCES IN ECONOMIC SYSTEMS

ECONOMIC FREEDOM

Table 1.2

Heritage Foundation Indices of Economic Freedom

|Rank |Country |Score |Rank |

|2 |United States |40 |Jamaica |

|3 |Netherlands |41 |Poland |

|4 |Germany |42 |Latvia |

|5 |Switzerland |43 |Greece |

|6 |Sweden |44 |Jordan |

|7 |United Kingdom |45 |Egypt |

|8 |Denmark |46 |Uruguay |

|9 |Australia |47 |China |

|10 |Singapore |48 |Panama |

|11 |Canada |49 |Lithuania |

|12 |France |50 |Costa Rica |

|13 |Austria |51 |Mexico |

|14 |Belgium |52 |Mauritius |

|15 |Japan |53 |Argentina |

|16 |Iceland |54 |Philippines |

|17 |Israel |55 |Indonesia |

|18 |Hong Kong |56 |Colombia |

|19 |Norway |57 |Sri Lanka |

|20 |New Zealand |58 |Russia |

|21 |Taiwan |59 |Dominican Republic |

|22 |Ireland |60 |Ukraine |

|23 |Spain |61 |Romania |

|24 |Italy |62 |Vietnam |

|25 |South Africa |63 |Peru |

|26 |Hungary |64 |El Salvador |

|27 |Estonia |65 |Zimbabwe |

|28 |Korea |66 |Venezuela |

|29 |Chile |67 |Nigeria |

|30 |Brazil |68 |Bulgaria |

|31 |Portugal |69 |Guatemala |

|32 |Slovenia |70 |Paraguay |

|33 |Turkey |71 |Nicaragua |

|34 |Trinidad and Tobago |72 |Ecuador |

|35 |Czech Republic |73 |Bangladesh |

|36 |India |74 |Honduras |

|37 |Malaysia |75 |Bolivia |

|38 |Thailand | | |

SOURCE: World Economic Forum: Global Competitiveness Report 2001-2002. p. 15

▪ The openness of the economy to international trade and finance

▪ The role of the government budget and regulation

▪ The development of financial markets

▪ The quality of the economic infrastructure

▪ The quality of business management

▪ The degree of labor market flexibility

▪ The quality of judicial and political institutions

THE EXTENT OF CORRUPTION

Perceptions of Corruption Index, Selected Countries, 2001

|Rank |Country |Score |Standard Deviation |

|1 |Finland |9.9 |0.6 |

|2 |Denmark |9.5 |0.7 |

|3 |New Zealand |9.4 |0.6 |

|4 |Iceland |9.2 |1.1 |

|5 |Singapore |9.2 |0.5 |

|6 |Sweden |9 |0.5 |

|7 |Canada |8.9 |0.5 |

|8 |Netherlands |8.8 |0.3 |

|9 |Luxembourg |8.7 |0.5 |

|10 |Norway |8.6 |0.8 |

|11 |Australia |8.5 |0.9 |

|12 |Switzerland |8.4 |0.5 |

|13 |United Kingdom |8.3 |0.5 |

|14 |Hong Kong |7.9 |0.5 |

|15 |Austria |7.8 |0.5 |

|16 |Israel |7.6 |0.3 |

|17 |USA |7.6 |0.7 |

|18 |Chile |7.5 |0.6 |

|19 |Ireland |7.5 |0.3 |

|20 |Germany |7.4 |0.8 |

|21 |Japan |7.1 |0.9 |

|22 |Spain |7 |0.7 |

|23 |France |6.7 |0.8 |

|24 |Belgium |6.6 |0.7 |

|25 |Portugal |6.3 |0.8 |

|26 |Botswana |6 |0.5 |

|27 |Taiwan |5.9 |1 |

|28 |Estonia |5.6 |0.3 |

|29 |Italy |5.5 |1 |

|30 |Hungary |5.3 |0.8 |

|31 |Slovenia |5.2 |1 |

|32 |Uruguay |5.1 |0.7 |

|33 |Malaysia |5 |0.7 |

|34 |Jordan |4.9 |0.8 |

|35 |Lithuania |4.8 |1.5 |

|36 |South Africa |4.8 |0.7 |

|37 |Costa Rica |4.5 |0.7 |

|38 |Mauritius |4.5 |0.7 |

|39 |Greece |4.2 |0.6 |

|40 |South Korea |4.2 |0.7 |

|41 |Peru |4.1 |1.1 |

|42 |Poland |4.1 |0.9 |

|43 |Brazil |4 |0.3 |

|44 |Bulgaria |3.9 |0.6 |

|45 |Colombia |3.8 |0.6 |

|46 |Mexico |3.7 |0.6 |

|47 |Slovak Republic |3.7 |0.9 |

|48 |El Salvador |3.6 |0.9 |

|49 |Turkey |3.6 |0.8 |

|50 |Argentina |3.5 |0.6 |

|51 |China |3.5 |0.4 |

|52 |Zimbabwe |2.9 |1.1 |

|53 |India |2.7 |0.5 |

|54 |Bolivia |2 |0.6 |

| | | | |

Note: Only countries for which four or more surveys were extant are included.

SOURCE: Transparency International: Corruption Perceptions Index 2001



OTHER MEANS OF CLASSIFICATION

LEVELS OF INCOME

 Table 1.5

Distribution of World Economies by Income per Head, 2000

|Income Level of Economy |Population (Millions) |Per Head PPP GNI |Percent of Total Population |Percent of Total GNI |

| | |(2000) | | |

|Low |2459 |$1990 |40.62 |10.99 |

|Lower Middle |2046 |$4580 |33.80 |21.06 |

|Upper Middle |647 |$9170 |10.69 |13.32 |

|High |903 |$27450 |14.92 |55.68 |

|Total |6054 |$7350 |100.0 |100.0 |

SOURCE: The World Bank Development Report 2001/2002

RECENT ECONOMIC PERFORMANCE

Table 1.6

Economic Indicators for Selected Economies

United Czech South

States Japan France Sweden Republic Russia Korea

Growth of GDP,

  1990-98 2.2 1.3 1.5 1.2 -0.2 -7.0 6.2

Inflation, annual rate,

  1990-98 2.2 0.4 1.7 2.3 17.1 235.3 5.1

Unemployment, 5.4 3.3 10.4 4.8 6.2 12.0 3.3

Current account balance

  (as % of GDP, 2001) -4.4 2.5 1.9 2.5 -4.8 1.8 2.4

SOURCE: World Development Report 2001, International Financial Statistics, September 2002, OECD Economic Outlook, June 2001

THE STRUCTURE OF OUTPUT

 Table 1.7

The Structure of Output in Selected Economies, 2001

(% of GDP originating in each sector)

| |

|Agriculture |

|Extractive Industry |

|Manufacturing |

|Services |

|Income per head $, |

|current exchange rates |

| |

|Albania |

|63 |

|18 |

|na |

|19 |

|810 |

| |

|Benin |

|39 |

|6 |

|8 |

|47 |

|380 |

| |

|India |

|28 |

|9 |

|16 |

|46 |

|430 |

| |

|China |

|17 |

|26 |

|24 |

|33 |

|750 |

| |

|Brazil |

|9 |

|6 |

|23 |

|62 |

|4,570 |

| |

|Korea |

|5 |

|12 |

|32 |

|51 |

|7,970 |

| |

|United Kingdom |

|2 |

|10 |

|21 |

|67 |

|21,400 |

| |

|France |

|2 |

|7 |

|19 |

|72 |

|24,940 |

| |

|Japan |

|2 |

|13 |

|24 |

|61 |

|32,380 |

| |

THE DISTRIBUTION OF INCOME

Distribution of Economic Well-Being (% of GDP per quintile)

| |Quintile |PPP* |

|Country|First |Second |Third |

|2002 Environmental Sustainability Index, Yale Center for Environmental Law and Policy and the Center for International Earth |

|Science Information Network, Columbia University, February, 2002.  |

|Available at |

Are Some Systems Better than Others?

KEY TERMS AND CONCEPTS

Asian Tigers

beliefs

Glass-Steagall Act

capitalism

cash-flow right

centrally planned economic system

choice of technique

coercion

company unions

competitiveness

control right

corruption

craft or occupational unions

disposal right

distributional decision

economic freedom

environmental sustainability

NGOs

Pacific-rim capitalism

policies

practices

principal/agent problems

production decision

property rights

regulations

Rhine model

European Union

Gini coefficient

households

human capital

indicative planning

industry capital

instruments

the invisible hand

laws

legality

Lorenz Curve

material incentives

measures

moral persuasion

natural resources

Robinson Crusoe economy

Smith, Adam

social democracy

Socialism

system

universal banks

welfare state

worker-managed socialism

QUESTIONS FOR DISCUSSION

1. Discuss the nature of national wealth. Where do you believe the greatest source of long-term increase in wealth will lie?

2. Why might a high measure of economic freedom lead to a high growth of GNP?

3. Corruption is often compared to a tax. Why?

4. Why is a more even distribution of income considered an advantage for a society? Can you think of negative aspects of an even distribution of income?

5. Why are NGOs increasing their scope of activity?

6. Why is the contemporary fixation of achieving a favorable balance of trade sometimes called “new mercantilism”?

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